Subscribe Now!
Free Daily News, Jobs, Webcasts, Discussions
Post and Distribute
Your Jobs
ARPA News
ARPA Webcasts

Featured Jobs

DB Retirement Plan Administrator

The Nolan Company
(Telecommute / Overland Park KS)

The Nolan Company logo

Director of 401(k) Implementation, Core

Human Interest
(Telecommute / Mill Valley CA)

Human Interest logo

Plan Document Specialist

Jocelyn Pension Consulting
(Telecommute / Boulder CO / San Rafael CA)

Jocelyn Pension Consulting logo

Product Support Consultant

ftwilliam.com part of Wolters Kluwer Legal & Regulatory
(Telecommute)

ftwilliam.com part of Wolters Kluwer Legal & Regulatory logo

Retirement Plan Administrator (Account Manager)

Kushner & Company
(Telecommute / Portage MI)

Kushner & Company logo

Retirement Plan Administrator

My Benefits, LLC
(Telecommute / Daphne AL / Atlantic Beach FL)

My Benefits, LLC logo

Retirement Plan Administrator

RSW & Associates
(CT / NJ / NY)

RSW & Associates logo

401(k) Consultant

TPS Group
(Telecommute / North Haven CT)

TPS Group logo

Retirement Plan Administrator

Bates & Company
(Telecommute / Winter Park FL)

Bates & Company logo

DB/DC Administrator

Primark Benefits
(Telecommute / Burlingame CA)

Primark Benefits logo

Employee Benefits/Health and Welfare Attorney

Miller Johnson
(Telecommute / Grand Rapids MI / Kalamazoo MI / Detroit MI)

Miller Johnson logo

Director of Finance

NYCDC of Carpenters Benefit Funds
(New York NY)

DC or DB Administrator

Farmer & Betts, Inc.
(Telecommute / Tacoma WA / Tualatin OR / Littleton CO)

Farmer & Betts, Inc. logo

Retirement Plan Consultant / Relationship Manager

Associated Pension Consultants
(Chico CA / Sacramento CA)

Associated Pension Consultants logo

401(k) Implementation Manager

Human Interest
(Telecommute / San Francisco CA)

Human Interest logo

DC Retirement Plan Administrator

The Nolan Company
(Telecommute / Overland Park KS)

The Nolan Company logo

Free Newsletters

“BenefitsLink continues to be the most valuable resource we have at the firm.”

-- An attorney subscriber

Mobile App image LinkedIn icon
Twitter icon
Facebook icon

BenefitsLink > Q&A Columns >

Who's the Employer?

Answers are provided by S. Derrin Watson, JD, APM

Who Is Counted in Applying the General Nondiscrimination Test?

(Posted November 24, 2016)

Question 331: A and B are in a controlled group. A sponsors a cross-tested profit sharing plan for its employees only. The plan passes coverage, but my concern is nondiscrimination. When performing rate group testing and the average benefit percentage test, does the plan count the employees of B?

Answer:

Yes. The general test requires that each rate group satisfies the coverage requirements of Code §410(b) as though it were a separate plan. [Treas. Reg. §1.401(a)(4)-2(c)(1).] To show that each rate group passes coverage, the plan takes "into account all nonexcludable employees regardless of whether they benefit under the plan." [Treas. Reg. §1.401(a)(4)-2(c)(3).]

Let's demonstrate this with an example. In the interests of simplicity, Plan A will test based on contributions rather than benefits. For the moment, assume A is not related to any other employer. All A employees participate. The table shows each participant's 2017 allocation.

Employee Comp Contrib Alloc Rate
HCE 1 270,000 54,000 20.00%
HCE 2 270,000 54,000 20.00%
HCE 3 200,000 50,000 25.00%
HCE 4 125,000 6,250 5.00%
NHCE 1 80,000 2,400 3.00%
NHCE 2 64,000 1,920 3.00%
NHCE 3 50,000 1,500 3.00%
NHCE 4 40,000 8,000 20.00%
NHCE 5 36,000 7,200 20.00%
NHCE 6 30,000 7,500 25.00%

60% of the participants are NHCEs, and so the concentration percentage is 60% and the midpoint percentage for rate group testing is 45%. The 25% and 20% rate groups each have a coverage fraction of 66.67% and the 5% rate group has a coverage fraction of 50%. Overall, the plan satisfies the average benefit percentage test with 70.48%. The plan satisfies both coverage and nondiscrimination.

But, now suppose A is in a controlled group with B, and that B employees do not participate. B has 1 HCE and 4 NHCEs that satisfy the minimum age and service requirements. Counting all employees of A and B, the plan benefits 6/10 NHCEs and 4/5 HCEs. This gives a coverage fraction of 75%. The plan passes the ratio percentage test for coverage on a controlled group basis.

However, the general nondiscrimination test is another matter.Combining A and B, 10/15 of the employees are NHCEs and so the midpoint percentage drops to 40.5%. However, the 5% rate group benefits only 3 out of the 10 NHCEs, while it benefits 4 of the 5 HCEs, for a coverage fraction of 37.5%. That group does not satisfy the nondiscriminatory classification test. Bringing the employees of B into the test, the plan also fails the average benefit percentage test with 52.86%.

This illustrates a crucial point. We often say controlled group status does not pose a problem if the plan passes coverage. But that is only half the story. The plan must pass both coverage and nondiscrimination, and if the plan is relying on the general nondiscrimination test, then it must pass 401(a)(4) on a controlled group basis.


Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.


Copyright 1999-2017 S. Derrin Watson
Related links:

(restricted access)

(restricted access)

© 2021 BenefitsLink.com, Inc.